Chapter 9, Principles.f03 (1).ppt

8/18/2019 Chapter 9, Principles.f03 (1).ppt

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Monopoly and Other

Forms of ImperfectCompetition


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Copyright c 2004 by The McGraw!illCompanies" Inc# $ll rights reser%ed#

Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2

Imperfect Competition

Imperfectly Competitive FirmsHave some control over price

Price may be greater than the cost of

production

Long-run economic profits are possible


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )


Perfect Competition An ideal market that maximies economic

surplus

A situation that does not al!ays exist


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Imperfectly Competitive "arkets#educe economic surplus to varying

degrees

Are very common


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide *


$arious Forms of Imperfect CompetitionPure "onopoly %most inefficient&

'he only supplier of a uni(ue product !ith no

close substitutes


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide +


$arious Forms of Imperfect Competition)ligopoly %more efficient than a monopoly&

A firm that produces a product for !hich only a

fe! rival firms produce close substitutes


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide ,


*ifferent Forms of Imperfect

Competition"onopolistic Competition %closest to

perfect competition& A large number of firms that produce slightly

differentiated products that are reasonably

close substitutes for one another


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide -


'he +ssential *ifference ,et!een

Perfectly and Imperfectly Competitive

Firms'he perfectly competitive firm faces a

perfectly elastic demand for its product

'he imperfectly competitive firm faces a

do!n!ard-sloping demand curve


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide &


In perfect competition.upply and demand determine e(uilibrium

price The firm has no market power.

At the e(uilibrium price/ the firm sells all it

!ishes


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .0


0ith perfect competitionIf the firm raises its price/ sales !ill be

ero

If the firm lo!ers its price/ sales !ill not

increase

'he firm1s demand curve is the horiontal

line at the market price


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide ..


0ith imperfect competition'he firm has some control over price or

some market power.

'he firm faces a do!n!ard sloping

demand curve


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .2

The /emand Cr%es Facing 1erfectlyand Imperfectly Competiti%e Firms

antity

3 4 0 n i t o f o 0 t p 0 t

antity

DMar5etprice 1

r i c e

D

1erfectly competiti%e firm Imperfectly competiti%e firm


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .)

Fi%e (orces of Mar5et 1ower

+xclusive control over inputs

Patents and copyrights

2overnment licenses or franchises +conomies of scale %natural monopolies&

3et!ork economies


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .*

Total and $%erage Total Costs for a1rodction 1rocess with 6conomies of (cale

$ % e r a g e c o s t

8 3 4 0 n i t 9

antity

T o t a l c o s t 8 3 4 y e

a r 9

antity

F

0

F : 0

TC ; F : M

Total cost rises at a constantrate as otpt rises

ATC = F/Q + M

M

$%erage costs decline and isalways higher than marginal cost


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .+

Costs for TwoCompter Game 1rodcers 8.9


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .,

Costs for TwoCompter Game 1rodcers 829

$nnal prodction ."000"000 ."200"000Fi7ed cost 3.0"000"000 3.0"000"000

=ariable cost 3200"000 3240"000

Total cost 3.0"200"000 3.0"240"000

$%erage total cost per game 3.0#20 3-#*)


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .-

$nnal prodction *00"000 .",00"000Fi7ed cost 3.0"000"000 3.0"000"000

=ariable cost 3.00"000 3)40"000

Total cost 3.0".00"000 3.0")40"000

$%erage total cost per game 320#20 3+#0-

Costs for TwoCompter Game 1rodcers 8)9


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide .&

6conomies of (cale and theImportance of Fi7ed Costs

Fixed investment in research and

development has been increasing as a

share of production costs

.&-4 20? -0?.&&0 -0? 20?

Cost of prodcing a compter Fi7ed Cost =ariable Cost

(oftware !ardware


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1rofit Ma7imi@ation for the Monopolist

A price taker %perfect competition& and a

price setter %imperfect competition&

share t!o economic goals 'hey !ant'o maximie profits

'o select the output level that maximies

the difference bet!een TR and TC / !here

MB= MC.


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2.


For a producer MB 5 "arginal #evenue %MR & or a change

in a firm1s total revenue that results from a

one-unit change in output


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"arginal #evenue for the "onopolistPerfect competition and monopolies

,oth increase output !hen MR > MC.

Calculate MC the same !ay

*o not have the same MR at a given price

o In perfect competition6 MR = P

o In monopoly6 MR < P


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2)

The Monopolist>s Benefitfrom (elling an $dditional Anit

1 r i c e 8 3 4 0

n i t 9

antity 8nitswee59

D

-

-

2

+

)

*

4 If P ; 3+" then TR ; 3+ 7 2 ; 3.24 If P ; 3*" then TR ; 3* 7 ) ; 3.*4 The MR of selling the )rd nit ; 3) 8.*.294 For the )rd nit" MR = $3 < P ; 3*


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)bservationsMR < P

MR declines as (uantity

increasesMR is the change bet!een

t!o (uantities

MR < P because price must

be lo!ered to sell anadditional unit

+ 2 .2

* ) .*

4 4 .+

) * .*

1 T M

)

.

.

Marginal e%ene inGraphical Form


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2*

1 r i c e

C m a r g i n a l r e % e n 0 e 8 3 4 0 n i t 9

antity 8nitswee59

+ 2 .2

* ) .*

4 4 .+

) * .*

1 T M

)

.

.

-

-

D

Marginal e%ene inGraphical Form

4)2.

)

*

.

MR


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2+

The Marginal e%ene Cr%e for aMonopolist with a (traightDine /emand Cr%e

1 r i c

e

antityObser%ations4 The %ertical intercept" a" is the same for MR and D4 The hori@ontal intercept for MR, Q 0 /2, is one half the

demand intercept" Q 0.

D

0

a

0 2

a2

MR


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2,


Profit "aximiing *ecision #ule0hen MR > MC, output should be increased

0hen MR < MC, output should be reduced

Profits are maximied at the level of output

for !hich MR = MC.


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2-

The Monopolist>s 1rofitMa7imi@ing Otpt De%el

1 r i c e 8 3 4 0 n i t o f o

0 t p 0 t 9

antity 8nitswee59

+

D

)

.2 24

Marginal Cost

2

4

MR

-

Obser%ations4 If P = 3) Q = .2 MR < MCand otpt shold beredced

4 1rofits are ma7imi@ed at -nits where MR = MC

4 P = 34 where Eantitydemanded ; Eantityspplied


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 2&

6%en a Monopolist May(ffer an 6conomic Doss

1 r i c e 8 3 4 m i n

0 t e 9

Mintes 8millionsday9

1 r i c e 8 3 4 m i n

0 t e 9

Mintes 8millionsday9

2420

0#.2

0#.0 ATC

20

0#0-0#.0

ATC

6conomic loss; 3400"000day

6conomic profit; 3400"000day

D

0#0* MC

MR

D

0#0* MC

MR

Being a monopolist doesn>t garantee an economic profit


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )0

D

)

.2

+

24

Marginal cost

The socially optimal$mont occrs whereMC = D8MB9 .2 nits

The /emand and Marginal CostCr%es for a Monopolist

1 r i c e 8 3 4 0 n i t o f o

0 t p 0 t 9

antity 8nitswee59

hy the In%isible !and Brea5s /own Ander Monopoly


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide ).

2

4

MR

-

4 The profit ma7imi@ing le%el ofotpt of - nits" where MR =MC,

is less than the sociallyoptimal otpt of .24 Between - and .2" MB to

society H MC to society4 Cannot increase otpt

becase MR to the firms is lessthan MC


1 r i c e 8 3 4 0 n i t o f o

0 t p 0 t 9

antity 8nitswee59

D

.2

+

24


)

Marginal cost


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2

4

MR

-

4 Becase MR < P, the monopoly

prodces less than the sociallyoptimal amont4 The deadweight loss of the

monopoly to society ; 8.29832nit984nitsw59 ; 34w5#

/eadweight loss


1 r i c e 8 3 4 0 n i t o f o

0 t p 0 t 9

antity 8nitswee59

D

.2

+

24


)

Marginal cost

MB MC


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide ))

hy the In%isible !and Brea5s/own Ander Monopoly

"onopolyProfits are

maximied !here

MR = MC.

P > MR

P > MC

*ead!eight loss

Perfect CompetitionProfits are

maximied !here

MR = MC.

P = MR

P = MC

3o dead!eight loss

MB MC


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*ifficulties in #educing the *ead!eight

Loss of "onopolies+nforcing antitrust la!s

Patents/ copyrights/ and innovation

3atural monopolies


MB MC


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )*

Price *iscrimination'he practice of charging different buyers

different prices for essentially the same

good or service


MB MC


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )+

+xamples of Price *iscrimination.enior citiens and student discounts on

movie tickets

.upersaver discounts on air travel

#ebate coupons


MB MC


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide ),

+conomic 3aturalist0hy do many movie theaters offer

discount tickets to students7


MB MC Asing /isconts


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )-

Asing /iscontsto 67pand the Mar5et

Perfectly *iscriminating "onopolistCharging each buyer exactly their

reservation price

+conomic surplus is maximiedConsumer surplus is ero

+conomic surplus 5 producer surplus

MB MC Asing /isconts


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide )&

Limitations to Perfect Price

*iscrimination.eller !ill not kno! each buyer1s

reservation priceLo! price buyers could resell to other

buyers at a higher price

Asing /iscontsto 67pand the Mar5et

MB MC

1 bli 1 li T d


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1blic 1olicy Toward


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 4.

1blic 1olicy Toward


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1 bli 1 li T d


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Chapter &' Monopoly and Other Forms of Imperfect Competition (lide 4)

1blic 1olicy Toward


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Chapter 9, Principles.f03 (1).ppt